The American Dream depends on patent reform

Zack Christenson Research Fellow, American Consumer Institute
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Thousands of people every year travel to America in an attempt to live the American Dream. At the core of the American Dream, at least for many entrepreneurs, is the United States patent system. Patents are what help our economy run, and they produce benefits for the consumer as well.

Patents incentivize the creation of new products and ideas, and lead to innovation and improvement of existing technologies – all of which drive a vibrant economy. Without the protection of a patent, entrepreneurs and businesses would have no motivation to invest in new ideas and no new jobs would be created based on those ideas.

As significant as the U.S. patent system is, there are many issues that suggest it needs reform. For one, many corporations are abusing the patent system’s rules. When rules are abused, the patent system ends up doing the exact opposite of what it was meant to promote — innovation and creation by entrepreneurs. Indeed, there are good patents and bad patents.

Patents are sometimes hoarded and collected by companies until they see someone trying to actually build the same idea, then they sue. These so-called patent trolls are extremely harmful to small-businesses, especially in the tech sector. These are firms that buy and hold patents with no intention of producing a product. These firms look to profit not by manufacturing consumer goods, but by suing firms that do.

It’s estimated that up to one-third of all startups have been threatened with a lawsuit by a patent troll. Defending yourself against one of these lawsuits can be be costly, in time and money. Because startups are cash-strapped and usually working with a lean workforce, the last thing they need is to devote precious resources to these often frivolous lawsuits. Since 2005, the number of lawsuits filed by patent trolls has quadrupled, and cost the economy $80 billion dollars worth of lost economic activity in 2011 alone.

Patent pools are another form of potential patent abuse. Patent pools are groups of companies or individuals that pool their patents together to share them and create a simple system for licensing them. They’re completely legal, approved by the Justice Department, and often serve a good purpose. But sometimes, patent pools can go off the rails. Some of the companies that manage these pools buy up patents from for the sole purpose of suing those they think could possibly be infringing on that patent. On patent pool example is MPEG LA, which manages the patent pool for the MPEG-video compression technology that powers video on many televisions and PCs. MPEG LA has allegedly used their ownership of these patents to drive up the licensing costs of using the technology, thereby artificially driving up prices for consumers.

Patent abuses are costly for consumers and the larger economy — they stifle innovation, artificially inflate patent licensing fees and lock up production of goods. It’s become so bad, that even retailers are starting to speak up. Beginning last month, a group of trade organizations banded together to begin running ad campaigns in 17 states to raise awareness of the harmful practices of patent trolls, and the toll it takes on small businesses, startups, consumers, and ultimately, the economy.

Thankfully, Congress seems to be taking notice. Congressman Bob Goodlatte (R-VA) is working on new draft legislation that would combat the abusive practices of patent trolls. But there’s no time to waste. If Congress wants to see technology and innovation in the United States continues to flourish and to encourage entrepreneurs in their quest for the American Dream, reforming the patent system to defend against trolls and dissuade bad acting pools is an absolute must.

Zack Christenson writes on digital tech issues for the American Consumer Institute Center for Citizen Research, a nonprofit educational and research organization.  For more information, visitwww.theamericanconsumer.org.